Happiness and Public Choice
With Alois Stutzer Parts of the content published 2010 in "Happiness and public choice", Public Choice, 144, pp. 557-573, are identical with the 2009 article "Should national happiness be maximized?", published in A.K. Dutt, Benjamin Radcliff, Edward Elgar Pub, "Happiness, economics and politics: towards a multi-disciplinary approach", ISBN-10: 1848440936, ISBN-13: 978-1848440937 , pp. 301-323. However, the 2010 article does not refer to the 2009 article. A number of paragraphs of the 2010 article are very close to the 2009 book section. Here a few examples: *2010 article, p. 560 "These are excluded, or inadequately included, in the traditional national accounts, and therewith in GNP. Aggregate happiness measures also go far beyond existing extensions of GNP (for a recent survey, see Michalos 2005), such as the “Measure of Economic Welfare” (Nordhaus and Tobin 1972), “Economic Aspects of Welfare” (Zolatas 1981), “Index of Sustainable Economic Welfare” (Daly and Cobb 1989) or “Human Development Index” (United Nations Development Programme 2005). These indicators exhibit a markedly different development over time than happiness indicators (see, e.g., Blanchﬂower and Oswald 2005; Leigh and Wolfers 2006). 2. Measures of happiness consider outcome aspects of components already included in GNP via input measures. This holds, in particular, for the vast area of government ac tivity (measured in GNP by the costs of material and labor). It is also directly relevant for (public) health and educational expenditures. “Social Indicators” (e.g., the “Index of Social Progress” by Estes 1988) mostly measure the input side, such as the number of hospital beds and doctors, or the number of classrooms and teachers. 3. Measures of happiness look at subjectively evaluated outcomes in line with the basic methodological approach of economics. In contrast, the capabilities approach and the “Human Development Index” of the United Nations look at objectively observable functionings (Sen 1985, 1999; Nussbaum 2000)." 2009 book section, p. 307: "These are excluded, or most insufficiently included, in the traditional national accounts and therewith in GNP. One of the major challenges of happiness research is indeed to explain the 'Easterlin Paradox' (Easterlin, 1974, 1995, 2001) showing that in many countries real per capita income has dramatically increased but happiness has more or less stayed constant (see recently, for example, Di Tella and MacCuiloch, 2008). They go well beyond existing extensions of GNP such as the 'Measure of Economic Welfare' (Nordhaus and Tobin, 1972), 'Economic Aspects of Welfare' (Zolatas, 1981), 'Index of Sustainable Economic Welfare' (Daly and Cobb, 1989) or 'Human Development Index' (United Nations Development Programme, 2005). These indicators exhibit a strongly different development over time than happiness indicators (see, for example, Blanchflower and Oswald, 2005). '' 2. Measures of happiness consider outcome aspects of components already included in GNP via jnput measures. This holds in particular with respect to the vast area of government activity (measured in GNP by the costs of material and of labor). It is also directly relevant for (public) health and educational expenditures. 'Social indicators' (for example, the 'Index of Social Progress' by Estes (1988)) mostly measure the input side such as the number of hospital beds and of doctors, or of classrooms and teachers.'' '' 3. Measures of happiness Iook at subjectively evaluated outcomes in Iine with the basic methodological approach of economics. In contrast, the capabilities approach and the 'Human Development Index' by the United Nations Iook at objectively Observable functionings (Nussbaum, 1999, 2000; Sen, 1985, 1992, 1999)."'' *2010 article, p. 564-65: "The ordinalist revolution in economics, on which classical micro-economics is firmly based, takes it for granted that individual welfare can be measured only in an ordinal, but not in a cardinal way, and that it makes no sense to make interpersonal comparisons of utility. These are exactly the fundamental assumptions where the countermovement of happiness research sets in. Both cardinality and interpersonal comparability may be less of a problem on a practical level than on a theoretical level.6 For many applications, milder assumptions suffice. An important example is the valuation of public goods and public bads, based on the life satisfaction approach (see, e.g., Frey et al. 2009; van Praag and Baarsma 2004). Life satisfaction scores are reported on an ordinal scale. Using adequate statistical techniques, like ordered probit or ordered logit, the ordinal information is, however, sufficient to calculate a compensating surplus. Moreover, interpersonal comparability at the level of the individual is not a necessary condition for valuing public goods in the life satisfaction approach. It suffices if individual specific response frames do not systematically vary between different groups exposed to different levels of the public good, either across space or over time." 2009 book section, p. 309-10: "The ordinalist revolution in economics on which classical microeconomics is firmly based takes it for granted that individual welfare can only be measured in an ordinal, but not in a cardinal way, and that it makes no sense to make interpersonal comparisons of utility. These are exactly the fundamental assumptions where the counter revolution of happiness research sets in. If the accumulated evidence (partly mentioned above) is judged sufficient in the sense that it allows to cardinally measure and interpersonally compare happiness, then a, or in fact many, social welfare functions exist. An appealing social welfare function probably is the unweighted sum of individual cardinal welfares or happiness. However, given that people have preferences over the distribution of happiness scores in a society, no consistent social welfare ordering can be derived. We do not take a position here. We think, however, that both cardinality and interpersonal comparability may be Iess of a problem on a practical Ievel than on a theoretical level.6 Moreover, for many applications milder assumptions are sufficient. An important example is the valuation of public goods and public bads based on the life satisfaction approach (see, for example, Frey et al., 2009). Scores of life satisfaction are reported on an ordinal scale. Using adequate statistical techniques like ordered probit or ordered logit, the ordinal Information is, however, sufficient to calculate a compensating surplus. Moreover, interpersonal comparability at the level of the single individual is not a necessary condition for valuing public goods in the life satisfaction approach. It is sufficient if individual specific response frames do not systematically vary between different groups exposed to different Ievels of the public good either across space or over time." *2010 article, p. 566: "Classical welfare economics, which was initially due to, and strongly inﬂuenced by Rob- bins (1932) and Hicks and Allen (1934), has for a long time raised fundamental arguments against using the concept of aggregate social welfare in contrast to individual welfare. The two most important, and partially interconnected (see Sen 1970), objections to the concept of aggregate social welfare are (1) the impossibility of cardinal measurement and interpersonal comparisons of individual welfare, and (2) the impossibility theorem relating to aggregate or social welfare. Based on the arguments and the evidence presented above, it may be concluded that, while the objections from classical welfare economics must be taken seriously, the exist ing state of research suggests that, for many purposes, reported subjective well-being is a satisfactory empirical approximation to individual welfare. However, the problem of aggregating individual preferences to a social welfare function under non-dictatorial conditions remains fundamental. Since Arrow (1951), it has been widely accepted that, given a number of “reasonable” conditions, no social welfare function exists that generally ranks individual orderings of outcomes (e.g., different distributions of well-being scores) consistently, except a dictatorship. This impossibility result spawned a huge amount of literature (called ‘Social Choice’), analyzing its robustness to modiﬁcations of the assumptions. Theorem after theorem demonstrated that almost all changes in the axiomatic structure left the dictatorial result unchanged (see, e.g., Sen 1970, 1995; Slesnick 1998). The conclusion has been drawn that “there is no way we can use empirical observations on their own to produce an ethically satisfactory cardinalization, let alone an ethically satisfactory social welfare ordering” (Hammond 1991: 220–221)." 2009 book section, p. 309: "Classical welfare economics, initially due to, and strongly influenced by, Robbins (1932) and Hicks and Allen (1934), has for a long time raised fundamental arguments against using the concept of aggregate social welfare in contrast to individual welfare. The two most important, and partially interconnected (see Sen, 1970) objections to the concept of aggregate social welfare are, first, the impossibility of cardinal measurement and interpersonal comparisons, and, second, the impossibility theorem. Since Arrow (1951) it has been widely accepted that under a number of 'reasonable' conditions, no social welfare function exists that generally ranks individual orderings of outcomes consistently, except a dictatorship. This impossibility result spawned a huge amount of literature (called 'social choice'), analysing its robustness to modifications of the assumptions. Theorem after theorem demonstrated that almost all changes in the axiomatic structure left the dictational result unchanged (see, for example, Sen, 1970, 1995; Slesnick, 1998). It has been concluded that 'there is no way we can use empirical Observations on their own to produce an ethically satisfactory cardinalization, let alone an ethically satisfactory social welfare ordering' (Hammond, 1991, pp. 220-1)." *2010 article, p. 568: "When individuals become aware that the happiness level they report inﬂuences the behavior of political actors, they have an incentive to misrepresent it. They can “play the system”. The two systematic distortions discussed represent a basic phenomenon, which even applies to the natural sciences. The Heisenberg Uncertainty Principle states that the observa tion of a system fundamentally disturbs it. In the social sciences, both the observation and public reporting can change the observed behavior of the people involved. This reaction is related to Goodhart’s Law and the Lucas Critique (see Chrystal and Mizen 2003).9 Goodhart’s Law (1975) states that any observed statistical relationship—such as the happiness function—will tend to collapse once pressure is placed upon it for control purposes. The Lucas Critique (1976) refers more speciﬁcally to econometric modeling: a different policy making behavior (such as using an aggregate happiness indicator) inﬂuences the expectations of private agents and this changes behavior in a rational-expectations model." 2009 book section, p. 314: "When individuals become aware that the happiness Ievel they report influences the behavior of political actors, they have an incentive to misrepresent it. They try to 'play the system'. The two systematic distortions discussed represent a basic phenomenon even applying in the natural sciences. The Heisenberg Uncertainty Principle states that the observation of a system fundamentally disturbs it. In the social sciences both the observation and the public reporting can change the behavior observed of the persons involved. This reaction is known in macro-economics as Goodhart's Law and the Lucas Critique (see Chrystal and Mizen, 2003). Goodhart's Law (1975) states that any observed statistical relationship - such as the happiness function - will tend to collapse once pressure is placed upon it for control purposes. The Lucas Critique (1976) refers more specifically to econometric modeling: different policy-making behavior influences the expectations of private agents and this changes behavior in a rational-expectations model." *2010 article, p. 570: "The huge progress in the measurement of individual welfare makes it tempting to pursue the old dream of maximizing aggregate happiness as a social welfare function. Improvements in individual welfare are claimed to be directly measurable, and politics is seen as following advice and implementing it with suitable interventions in the political process. Based on public choice analysis, we argue that the appropriate approach is not to maximize aggregate happiness directly by seeking to improve outcomes through direct interventions. Rather, we see the role of happiness research as seeking to improve the nature of the political processes. Individuals should have more opportunity of advancing what constitutes their idea of the good life, both individually and collectively. They should be made aware that different issues require different measures and indicators of well-being. Happiness research should remain open to constructing a number of different indicators, reﬂecting well-being according to different aspects of life. Plurality is a necessary consequence of the procedural view outlined." 2009 book section, p. 316-17: "The big progress in the measurement of individual welfare makes it tempting to pursue the old dream of maximizing aggregate happiness as a social welfare function. Improvements in individual well-being are claimed to be measured directly and politics is seen as taking up advice and implementing it with suitable interventions in the political process. However, we postulate that the appropriate approach is not to maximize aggregate happiness directly in seeking to improve outcomes by direct interventions. We rather see the role of happiness research in seeking to improve the nature of the processes. People should become better able to advance their idea of the good life, individually and collectively. They should be made aware that different issues require different measures and indicators of well-being. Happiness research should remain open to constructing a number of different indicators, reflecting well-being according to different aspects of Iife. Plurality is a necessary consequence of the procedural view outlined."